Hmm the whole way bitcoin is set up is tailored to making this impossible. Anyone can write a wallet program and create a private key.
Of course when converting to Fiat money they have a chance to ask for ID but I don't see this happening with bitcoin to bitcoin transactions unless the whole protocol is changed around.
No need to change the protocol. It can be done by making unaccounted-for keys unusable, if the regulated industry coordinates. For instance:
- the regulated crypto industry can form a mining cartel that only approves tx between whitelisted addresses and orphans any attempt at doing otherwise (a 51% attack), to save their investment in the "number go up" game.
- the regulated industry can at transaction level reject any output that is not, transitively, formed only of whitelisted addresses. Unapproved transactions could still be mined and used between unapproved participants, but it would cause a split inside the network with a BTC-dark (all contaminated outputs) and BTC-clear (whitelisted only) and an (underground) exchange rate between both would emerge, analogous to some third world fiat currencies with a regulated fixed government exchange rate with say USD that differs from the street rate.
The latter is already emerging in a way with discounts for paying ransomware in monero (which gives an implied xrate between tainted BTC and clean BTC) as a response to the small amount of blacklisting clear exchanges have started doing.
Of course when converting to Fiat money they have a chance to ask for ID but I don't see this happening with bitcoin to bitcoin transactions unless the whole protocol is changed around.
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